First Appellate-Level Decision on Vavilov and Arbitration Muddies already Murky Waters

First Appellate-Level Decision on Vavilov and Arbitration Muddies already Murky Waters

Martin Valasek, Alison FitzGerald, and Alexa Biscaro, Norton Rose Fulbright Canada LLP

This case comment will also appear in Volume 2, Issue 1 of CJCA.

Until recently, the general consensus amongst Canadian courts had been that a significant degree of deference should be shown to domestic arbitral awards, and any appellate review should be done on a standard of reasonableness. Then, in December 2019, the Supreme Court of Canada rendered its decision in Vavilov,[1] which entirely restated the law on judicial review. Although the decision did not refer to arbitration, it raised the question: was it meant to apply to appeals from domestic commercial arbitration awards? First instance courts have considered the issue and remain split. In Northland Utilities,[2] the Northwest Territories Court of Appeal was the first appellate level court to weigh in. Far from helping to settle the matter, its decision has further muddied the waters.

Facts

On January 20, 2021, the Northwest Territories Court of Appeal rendered a decision arising from an appeal relating to a partial award in a domestic arbitration under the Northwest Territories Arbitration Act, 1988 (the “Arbitration Act”). While there were several issues before the Court, the most salient was whether the Supreme Court of Canada’s decision in Vavilov governs appeals from domestic commercial arbitration awards. According to the Northwest Territories Court of Appeal, it does.

The dispute dealt with a franchise agreement relating to the supply of electricity. Northland Utilities (“NU”) built an electrical system infrastructure; according to the terms of the agreement, the Town of Hay River (“Hay River”) could, but was not required to, purchase the system by a certain date. Before the deadline, Hay River notified NU of its intent to exercise the purchase option. However, the parties could not agree on the terms of purchase. The case was brought before an arbitrator under the Arbitration Act. The main issues were which assets could be purchased and how should they be valued. The arbitrator ruled that Hay River could purchase assets that NU argued were excluded from the agreement, and also accepted Hay River’s valuation method.

Right of appeal and lower court decision

Article 27 of the Arbitration Act allows for appeals on any question if such a right is agreed to in the arbitration agreement. It is an opt-in regime with no leave to appeal required. Clause 15 of the franchise agreement stated that the parties could appeal an award to a judge on any issue.

NU appealed the award before the Northwest Territories Supreme Court, which rendered its decision prior to Vavilov's release in December 2019. The court held that the arbitrator’s conclusions on questions of law were correct and that the arbitrator’s conclusions on mixed questions of fact and law were reasonable. It therefore dismissed the appeal.

NU further appealed the award to the Court of Appeal, arguing that, according to Vavilov, the lower court's decision upholding the arbitrator’s conclusions on a reasonableness standard must itself be reviewed on a correctness standard.

State of confusion post-Vavilov

In Vavilov, the Supreme Court of Canada held, inter alia, that where a statute explicitly provides for the right to appeal an administrative decision, the appellate standard of review applies. This was a marked departure from its previous administrative law jurisprudence. The question then was, are rights of appeal conferred by domestic arbitration statutes to be treated in the same way?

As a general comment, the Court of Appeal observed that the lower court was correct to conclude that, under the law at the time (i.e., pre-Vavilov), the standard of review in commercial arbitration appeals was virtually always reasonableness. The Court of Appeal also noted that Vavilov did not indicate whether the new judicial review framework would apply to commercial arbitration. It then referred to competing trial-level decisions from Alberta, Manitoba and Ontario, which had split on that issue.[3]

The Alberta Court of Queen’s Bench held in Cove Contracting that Vavilov does not apply to commercial arbitrations. The court reasoned that Vavilov could be distinguished from commercial arbitration cases because the former stemmed from the judicial review of decisions by administrative tribunals, rather than awards by decision-makers chosen by the disputing parties. It also noted that the Supreme Court of Canada in Vavilov did not refer to its earlier decisions in Sattva[4] and Teal Cedar,[5] which had established the standard of review applicable to domestic arbitral awards. Although the appeal before it arose as a result of a right of appeal conferred by the Alberta Arbitration Act, that did not bring it within the ambit of Vavilov.

The Alberta Court of Queen’s Bench further observed that the particular circumstances of Vavilov, in which a decision-maker was called upon to interpret a statutory provision for the first time in a complex, unique case, is unlikely to arise in commercial arbitration, where the parties appoint the decision-maker and are thus able to select an experienced and informed arbitrator. This reasoning was followed by the Ontario Superior Court.[6] However, the Manitoba Court of Queen’s Bench held in Buffalo Point that it was bound by Vavilov to apply a correctness standard to an appeal from an arbitral award on a point of law.[7]

NWT Court of Appeal equates domestic arbitral tribunals with administrative tribunals

Following its preliminary observations, the Court of Appeal’s analysis becomes problematic.

First, it states that pre-Vavilov, the Supreme Court of Canada applied the Dunsmuir standard of review framework to commercial arbitration awards. This is not entirely accurate. In Sattva, the Supreme Court of Canada confirmed that, although administrative law concepts may be analogous in some respects, they are not entirely applicable in the domestic commercial arbitration context, where appellate review “takes place under a tightly defined regime specifically tailored to the objectives of commercial arbitrations”.[8] As such, the Supreme Court of Canada confirmed in Sattva that administrative law concepts cannot be applied wholesale to commercial arbitration.

The Northwest Territories Court of Appeal’s understanding that the Dunsmuir standard of review applies mutatis mutandis to the review of commercial arbitration awards illustrates the historical difficulty that some Canadian courts have had in grappling with the nature and role of commercial arbitration. Indeed, there remains some hesitation in recognizing that commercial arbitration, unlike statutory arbitration in the labour context, for example, runs parallel to the domestic judicial system and does not need to be folded into it or treated as a rival.

Second, the Court of Appeal wrongly equated commercial arbitral tribunals with administrative tribunals. It stated that the term “appeal” must have the same meaning in all statutes, including domestic arbitration statutes. It also referred to the fact that in Vavilov, the Supreme Court of Canada stated that the presumption of reasonableness is no longer premised upon the concept of a tribunal’s relative expertise. The Court of Appeal took this relatively anodyne observation and ran with it, holding that commercial arbitrators have no greater expertise than “other administrative boards typically staffed by experienced adjudicators”.[9]

The Court of Appeal also rejected the argument that disruptions to the legal landscape of domestic arbitration should be avoided. In its view, the Dunsmuir standard of reasonableness and deference created greater uncertainty than an appellate standard of review. The development of a body of jurisprudence based on appellate rulings will assist in fostering acceptance of the predictability and reliability of Canadian decision-making, including decision-making by arbitrators.

On this basis, the Court of Appeal held that Vavilov applies to domestic commercial arbitrations: if a statute allows for an appeal, the standard of review is the standard on appeal. This means correctness for questions of law and palpable and overriding error for mixed questions of fact and law and questions of fact.

Where do we go from here?

The Court of Appeal’s analysis and conclusions highlight the historical misunderstanding of commercial arbitration by some Canadian courts. As stated above, commercial arbitration is not one step in the “normal” judicial process. Rather, it runs parallel to it, as an alternative method of dispute resolution. Thus, commercial arbitral tribunals are not administrative tribunals. They may be governed in part by statutes such as the Arbitration Act, but these are not “home” or “enabling” statutes. Rather, domestic commercial arbitral tribunals derive their jurisdiction—and most of their powers—from the parties’ arbitration agreement.

Though the Court of Appeal’s decision could be dismissed as a one-off in a jurisdiction that does not deal with many arbitrations, it is of concern for two main reasons.

First, Northland Utilities is the first appellate-level decision on this issue. Trial courts across the country may look to this judgment for guidance, especially considering that lower court decisions remain split.

Second, the Northwest Territories Court of Appeal is composed of judges from several provinces. In this particular case, all three judges sitting on the panel are listed as being from Calgary, Alberta. Therefore, this decision may offer a preview of how a panel of the Alberta Court of Appeal would approach the standard of review for domestic arbitral awards on appeal.

Recent developments at the Supreme Court of Canada add to this concern. The majority in Wastech Services opted not to opine on whether Vavilov affects the standard of review applicable to domestic arbitral awards as set out in Sattva and Teal Cedar.[10]

However, the concurring judges (Brown, Rowe and Côté JJ.), pointing to conflicting jurisprudence—including the Court of Appeal decision discussed here—deemed it necessary to resolve the issue. While they confirmed that there are important differences between commercial arbitration and administrative decision-making, they concluded that those differences do not affect the standard of review where the legislature has provided for a statutory right of appeal. In their view, factors that justify deference to an arbitrator, such as respect for the parties’ decision to arbitrate their dispute and to select an appropriate decision-maker, have no bearing on the interpretation of the term “appeal” in domestic arbitration statutes. In other words, the concurring judges in Wastech would have held that Vavilov has displaced Sattva and Teal Cedar.[11]

It remains to be seen whether Northland Utilities and the concurring judgment in Wastech get any traction amongst first instance and appellate courts in other provinces. The Supreme Court of Canada has not overturned Sattva and Teal Cedar, so deference and the reasonableness standard of review should be maintained with respect to appeals from domestic commercial arbitration awards.

While the concurring judgment in Wastech is disconcerting, it is unlikely to be reflected in a majority judgment anytime soon. The three concurring judges are known for rendering concurring and dissenting judgments, often as a group. That said, given the current state of confusion—and the fact that the majority of the Supreme Court of Canada chose not to weigh in—lower court judges who are uncomfortable with domestic commercial arbitration may rely on the Wastech concurrence to bolster the precedential value of Northland Utilities. If this were to become a trend, it could roll back decades of progress with respect to how our courts treat domestic commercial arbitration, especially how it is to be distinguished from statutorily-regulated administrative and arbitral tribunals.